Wind Energy Kerala Investment Analysis 080430

Wind Energy Projects in Kerala,India – considerations for
Investors
John Cyriac
john.e.cyriac@gmail.com
Version Date Author Comments

1.0 04 Mar 08 J Cyriac Draft 1
1.1 31 Mar. 08 J Cyriac Draft 2
1.2 30 Apr. 08 J Cyriac Final
Investing in Kerala Wind Energy
1 Agenda
1 AGENDA ........................................................................................................................... 2
2 ABBREVIATIONS ........................................................................................................... 3
3 ABSTRACT....................................................................................................................... 4
4 INTRODUCTION............................................................................................................. 4
5 ADMINISTRATIVE, LEGAL AND FINANCIAL FRAMEWORK FOR WIND

ENERGY PROJECTS IN KERALA .................................................................................... 7
6 ANALYSIS OF KERALA MODEL POWER PURCHASE AGREEMENT ........... 11
7 INVESTMENT APPRAISAL OF A HYPOTHETICAL WIND ENERGY

PROJECT IN KERALA ...................................................................................................... 16
8 CONCLUSION ............................................................................................................... 18
9 BIBLIOGRAPHY ........................................................................................................... 19
10 APPENDIX I ................................................................................................................. 23
©J Cyriac Student 2008 Page 2

2 Abbreviations
ANERT Agency for Non-Conventional Energy and Rural

Technology
C-WET Centre for Wind Energy Technology
CER Certified Emission Reduction Credit
CTU Central Transmission Utility
DWK 04 Policy Guidelines for the development of wind power

in Kerala through private developers. G.O. (MS) No:
23/2004/PD Dated 06 November 2004.
EA 2003 Electricity Act 2003
ERC 1998 Electricity Regulatory Commissions Act 1998
ESA 1948 Electricity (Supply) Act of 1948
IE 1910 Indian Electricity Act of 1910
INR Indian Rupees
IPP Independent Power Producer
IREDA Indian Renewable Energy Development Agency
KSEB Kerala State Electricity Board
KSERC Kerala State Electricity Regulatory Commission
MNES Ministry of Non-conventional Energy Sources
NLDC National Load Dispatch Centre
PPA Power Purchase Agreement
PPRDL 06 Power procurement from renewable sources by

distribution license regulations, 2006
RE Renewable Energy
RLDC Regional Load Dispatch Centre
SEB State Electricity Board
SLDC State Load Dispatch Centre
STU State Transmission Utility

3 Abstract
This paper analyses the legal and financial aspects of investing in Wind Energy Projects in
Kerala, India. Although the paper focuses on Kerala State, it can provide a basis for a
framework to analyze the viability of wind energy projects in other States of India also. The
paper starts with an overview of the wind energy sector in India and the scope for investors
in the sector. It then outlines the various policies at the central government level, which
forms the basis of State level regulations. The second section of the paper analyses the Kerala
State level policies and administrative frameworks applicable for an Independent Power
Producer (IPP) in the wind sector. The third section critically analyses the Kerala Model
Power Purchase Agreement (PPA) and summarizes risk allocation depicted by the PPA. The
fourth section of this paper considers a hypothetical wind energy project in Kerala using
standard figures assumed in the PPA and related policies and conducts an investment
appraisal. The paper concludes with a summary of findings from the legal and financial
analysis.
4 Introduction
4.1 Wind energy in India

Renewable energy (RE) is a growing area in India’s power sector. “India has an RE target of
10% (of total power supply) or 10,000 MW during 2003 to 2012”1. “The estimated potential
of RE in India is estimated to be 80,000 MW”2. As of 2006, “5.5% (6050 MW) of installed
power capacity in India is from RE”3. As of January 31, 2007, Indian RE installation rose to
9373 MW”4. This translates to a growth of more than 50% in a year.” By 2022, India is
expected to have installed RE of 54,003 MW”5. By the tremendous growth rate already
proved in the recent years, the target for 2022 looks achievable for India’s RE sector.
When it comes to RE from wind, “India is ranked fourth worldwide in terms of installed
wind capacity and is set to advance markedly on its installed capacity figure”6. The wind
capacity figures as of 2005 released by the Global Wind Energy Council are Germany
(18,428 MW), Spain (10,027 MW), the USA (9,149 MW) and India (4,430 MW)7. “The
cumulative installed capacity of grid-interactive wind power projects up to 31 March 2006
was 5382 MW. During 2006-07, 888 MW have been installed (up to 31 December 2006) and
1
Government of India (2006) Renewable Energy Policy.
2
Ibid.
3
ibid
4
Ministry of new and renewable energy(2007) Annual Report 2006-2007.
5
Ministry of new and renewable energy (2006) XITH PLAN PROPOSALS FOR NEW AND
RENEWABLE ENERGY.
6
Hauber, Grant(2007) Wind Energy Finance – Mobilising European Investment in the Indian Wind
Sector.
7
Adapted from Envis Centre on Renewable Energy and Environment (2006) Wind Energy Information.

as per trends it is likely that a total of 1700 MW would be added during the year”8. This
translates to a growth of more than 20% in a year. “By 2022, India is expected to have
installed RE from wind energy of 40,000 MW”9. This target for wind energy also looks
achievable by considering the achievements and growth shown by the industry in the recent
years.
From the above figures and trends, it is clear that the wind energy sector which boasts around
75% of the total RE projections is the biggest RE investment opportunity in India compared
to other sources of RE.
4.2 Policy framework for Wind Energy Project in India

4.2.1 Electricity Act 2003 (EA 2003)10
The electricity sector in India was governed in the earlier days by mainly two policies, the
Indian Electricty Act of 1910 (IE 1910) and the Electricity (Supply) Act of 1948 (ESA
1948). IE 1910 propagated a licensing system for electricity in India and ESA 1948 created
State control on electricity. State Electricity Boards (SEB) were created as per ESA 1948 and
they controlled the generation, transmission and distribution of electricity. However, many
SEBs were not able to meet the increasing demand of electricity and to bridge the demand
gap, ESA 1948 was amended in 1970, which allowed central government sponsored massive
power projects and the acceptance of captive power plants. IE 1910 and ESA 1948 were
further amended in the 1990s to allow private participation in power projects but were fully
controlled by the SEBs. These reform acts prompted SEBs to create separate generation,
transmission and distribution entities but prompted a Single Buyer model where transmission
and distribution were regulated. Electricity Regulatory Commissions Act was introduced in
1998 (ERC -1998) which created independent regulatory setups in the centre and state levels.
The Electricity Act 2003 (EA 2003) was enacted to consolidate all the previous policies and
to create a sustainable growth environment for electricity sector in India. EA 2003 aims to
create a multi-buyer, multi-seller system for electricity in India. As per Section 7 of EA
2003, electricity was made a non-licensed activity and IPPs can generate and sell electricity
to consumers other than SEBs. But as per section 62(1)(a) of the EA 2003, the tariff of sale
of electricity by the IPPs to the distribution licensee is controlled by the state regulatory
commission and there is no central method of tariff determination. Therefore, the state
regulatory commissions are free to choose the method of determining the tariff based on
general guidelines. In a later part of this paper, we will see the effect of this regulation in
action in the selected case study. EA 2003, Section 12 (a) maintains the transmission as a
regulated activity, which requires a license. In line with the previous regulations, there will
88
Ministry of new and renewable energy(2007) Annual Report 2006-2007.
9
Ministry of new and renewable energy (2006) XITH PLAN PROPOSALS FOR NEW AND
RENEWABLE ENERGY.
10
Adapted from Bhattacharyya, Dr. Subhes C (2003) Review of the Electricity Act 2003 of India.

still be a Central Transmission Utility (CTU) and State Transmission Utility (STU), which is
in charge of transmission. In addition, as per sections 2, 4 and 5 of EA 2003, the central
government is responsible for creating 1) National Tariff Policy and 2) Renewable Energy
Policy. As per section 110 and 111 of EA 2003, Appellate Tribunals are created to settle
disputes in relation to electricity contracts as they are more knowledgeable in the sector than
High Courts. EA 2003 also created a three tier load dispatching system. They are National
Load Dispatch Centre (NLDC), Regional Load Dispatch Centre (RLDC) and State Load
Dispatch Centre (SLDC). Load Dispatch Centers are separate government companies to
avoid conflicts of interest.
4.2.2 Central Government RE policies related to Wind Energy
4.2.2.1 Fiscal Incentives
As per the central government policy, “the SEB will purchase electricity offered by the
producer at a minimum rate of INR 2.25/unit, with no restriction on time or quantum of
electricity supplied for sale. This rate will be reviewed every year, and will be linked to
standard criteria such as wholesale price index. The producer will also have the option to sell
the electricity generated by him to a Third Party within the State, at a rate to be mutually
settled between them”11.
There are various tax incentives and concessions in customs tariffs provided by policy
provisions. However, these provisions change frequently and are not considered in this study.
4.2.2.2 Market Development Programme12
The current level of capacity addition have been achieved in India due to the market
development initiatives taken up by the Ministry of Non-conventional Energy Sources
(MNES). The market development initiatives of the MNES include:
• A comprehensive wind-mapping programme, largest in the world
• Analysis, compilation and publishing of wind speed and wind energy data
• Setting up of demonstration wind power projects
• Issuing guidelines to the State Electricity Boards to formulate policies towards grid
interfacing of wind power, banking and wheeling arrangements and the purchase rate
of electricity from the wind farms
• Policy of accelerated depreciation, concessions in import duty etc
11
Ministry of Non-Conventional Energy Government of India Non-conventional Energy Policy Guidelines
to States. Available at Appendix A of Hauber, Grant(2007) Wind Energy Finance – Mobilising European
Investment in the Indian Wind Sector.
12
Envis Centre on Renewable Energy and Environment (2006) Wind Energy Information.

• Encouragement towards development of indigenous wind turbine manufacturing

facilities
• Setting up of Indian Renewable Energy Development Agency (IREDA) and enabling

soft financing to wind farm projects through it.
4.3 Wind Energy in Kerala, India

Kerala is one of the Indian states in the southwestern region. “Kerala boasts 58% of the
installed capacity from RE (2079 MW from RE with a 3565 MW total capacity). Out of the
2079 MW of RE in Kerala, 2.03 MW is from wind energy and 1842 MW is from hydel.
Total RE potential in Kerala is 4,200 MW comprising of Wind Energy (850 MW), Bio Mass
(50 MW), Small Hydro (1000 MW) and Solar photovoltaic (2300 MW)”13.
Kerala has been selected for this case study in Wind Energy on account of the 99% unused
potential of the total wind energy resource and a strong political sentiment towards RE in the
State. In this case study, we will consider the legal and financial framework for doing a wind
energy project in Kerala. We will see the way; central policies and programs as described in
the previous sections are implemented at the State level. We will consider a typical wind
project based on certain assumptions and conduct an investment appraisal to decide the
feasibility of the project in Kerala.
5 Administrative, Legal and financial framework for Wind Energy

Projects in Kerala
5.1 Overview of Administrative framework

5.1.1 Kerala State Electricity Regulatory Commission (KSERC)14
The Kerala State Electricity Regulatory Commission ( KSERC) is a quasi-judicial body and
was created as per Subsection (1) of Section 17 of the “Electricity Regulatory Commissions
Act, 1998”15. Among the other functions, “KSERC is responsible for the following activities
in relation to Renewable Energy in Kerala”16.
• promote cogeneration and generation of electricity from renewable sources of

energy by providing suitable measures for connectivity with the grid and sale of
electricity to any person
13
Adapted from Kerala Planning Board (2006) Energy Development.
14
The Commission was constituted vide Government of Kerala Order (Ms) No.34/2002/PD dated 14th
November, 2002 notified in the Govt. of Kerala Gazette, Extra Ordinary dated 18th November, 2002.
15
Government of India (1998) THE ELECTRICITY REGULATORY COMMISSIONS ACT, 1998. With
effect from 10th June, 2003, the Commission has come under the purview of the Electricity Act, 2003, as the
Electricity Regulatory Commissions Act, 1998 has since been repealed.
16
Refer http://www.erckerala.org/codes/about.htm

• adjudicate upon the disputes between the licensees and generating companies and to
refer any dispute for arbitration
5.1.2 Power Department, Government of Kerala
“This department functions as the administrative department of the State Electricity Board.
This department handles tariff revision, new investments etc and issues related to the power
policy. It is headed by a Secretary to Government functions.”17
5.1.3 Kerala State Electricity Board (KSEB)
KSEB is the State Transmission Utility (STU), which provides transmission, planning and
co-ordination of transmission systems etc. Although the Electricity Act 2003 (EA 2003) calls
for a multi-buyer, multi-seller system, Kerala has not yet moved away from the ESA1948
and KSEB is not unbundled owing to various political issues.
5.1.4 Agency for Non-Conventional Energy and Rural Technology (ANERT)18
ANERT is an autonomous body of the Government of Kerala under the Department of

Power. It is engaged in the field of development and promotion of non-
conventional/renewable sources of energy in Kerala. ANERT is the nodal agency in Kerala
for implementing the renewable energy programs of the Union Ministry of Non-conventional
Energy Sources (MNES). ANERT also provides commercial services like wind energy
potential and analysis for developers.
“ANERT has identified the technical wind potential available in Kerala to be 600 MW”19.
ANERT lays down procedures for project preparation, approvals, monitoring etc and
promote RE sources. It is a single window clearing Agency for most of the RE power
projects. ANERT makes recommendations to the Government on the issues related to RE
development and certifies devices to RE sources.
5.1.5 Centre for Wind Energy Technology (C-WET)20
MNES established the Centre for Wind Energy Technology(C-WET) at Chennai in 1998–99
to cater to the felt-need of the emerging wind industry. C-WET’s broad aim is to address the
issue of making the Indian wind turbine designers and manufacturers take informed decisions
on designs that are suitable for the Indian market. From its inception, C-WET has been
providing the industry with much-needed wind resource assessment, testing, certification etc.
C-WET comprises five units, which are functionally organized.
17
Refer http://www.kerala.gov.in/dept_power/index.htm
18
Refer http://education.vsnl.com/anert/
19
Government of Kerala (2004) Policy Guidelines for the Development of Wind Power in Kerala Through
Private Developers. G.O. (MS) No: 23/2004/PD Dated 06 November 2004.
20
Information in this section is from Government of India, Ministry of Non Conventional Energy
Sources(2005) Centre for Wind Energy Technology. Also refer C-WET website at http://www.cwet.tn.nic.in/

• Research and Development
• Wind Resource Assessment
• Wind Turbine Testing
• Standards and Certification
• Information, Training, and Commercial Services
5.2 Overview of Legal framework governing the Kerala Model PPA

5.2.1 Kerala Renewable Energy Policy, 200221
This policy by the Kerala Government is to comply with MNES guidelines for state-level
renewable energy. This policy establishes the role of ANERT and is recognized as the State
Nodal agency for clearing all renewable energy projects in Kerala. This policy allows all
legal structures of private developers (sole traders, partnerships, limited companies etc) to
develop power plants in Kerala. Among other details, grid interfacing, tariff and other
financial details are set out in this policy. The tariff structure is provided as per Government
of India Non-conventional Energy Policy Guidelines to States.
5.2.2 Power Procurement from renewable Sources by Distribution Licensee regulations,

2006 (PPRDL 06)22
This policy sets out the minimum amount of renewable purchase and most importantly the
tariff of purchase. The structure of tariff outlined in Section 4.6 of Renewable Energy Policy,
2002 (base rate and 5% escalation in later years) is changed by this policy. Annex II of
PPRDL 06 gives specific guidance on wind energy tariff. Table 1 outlines the assumptions
and the tariff structure outlined by this policy. This policy is used as a guiding principle for
Kerala Model PPA, which is discussed later in this paper.
Capacity Utilisation Factor (CUF) 22%
Auxiliary Consumption 0.5%
Capital Cost (including connection till Rs. 4.4 Crore/MW

interconnection point)
Life of Plant 20 Years
Depreciation Rate 4.5% for 20 years with 10% residual

value
Operation & Maintenance Cost 1.3% of capital invested with escalation
21
Government of Kerala (2002) Kerala Renewable Energy Policy.
22
Kerala State Electricity Regulatory Commission (2006) Power procurement from renewable sources by
distribution license regulations, 2006.

of 4%
Interest cost on long term debt 9%
Loan repayment period 10 years
ROE 14% on equity portion of capital cost
Minimum Alternative Tax 10.1% of ROE (Reduction in tariff

owing to Tax holiday to be passed to
customers)
Tariff Rs. 3.14/unit for 20 years. (levelised

tariff at 12% discount rate for 20 years)
Table 1. Wind Energy Generation commercials for PPA as per PPRDL 06

5.2.3 Policy Guidelines for the development of wind power in Kerala through Private
Developers, 2006 (DWK 06)23
This policy was created as a modification for Kerala Renewable Energy Policy, 2002 by
incorporating EA 2003 provisions with specific emphasis on wind energy. The process of
approval of a wind energy project is outlined in this document along with modifications to
provisions related to grid interface, transmission etc. Figure 1 illustrates the workflow of
approvals for a wind energy developer as per DWK 06.
ANERT to decide
within 120 days of
submission or
applicant can proceed
as if it is approved
(Section 3.3 DWK 06)
2
Developer
1Individual/Co
mpany/Body ANERT
corporate/Partn C-WET
ership/JV
1
WEGs must be
approved by C-
3 Submits a Technical proposal along with State No Objection Certificates, WET- Section
4 Micro Siting, Land ownership certificates etc 3.15.3
Technical proposal should contain technical specification of WEGs,
Spacing between WEG, boundary clearances, evacuation plans, costs of
civil and electrical works, cost of WEGs,Cost of transmission lines for
Petition to evacuation of power up to KSEB grid etc (Section 3.4 DWK 06)
KSERC for
open access
Sign PPA with

KSEB
Figure 1. Workflow for Wind Energy Developer as per DWK 06

23
Government of Kerala(2004) Policy Guidelines for the development of wind power in Kerala through
private developers.

6 Analysis of Kerala Model Power Purchase Agreement
“Contracts that represent the obligation to make a payment to the project company on the
delivery of some product or service are very important because these contracts govern cash
flow”.24 In this section, we will review the Model PPA, which governs the cash flow to the
IPP.
6.1 Overview of the PPA

Table 2 gives an overview of the major features of the Model PPA to be considered by an
investor in a Kerala Wind Energy project.
Sl. Feature Description

No
1. Basic Features
1.1 Parties and Term PPA is between KSEB and the IPP. This is a 20 year contract
1.2 Delivery of Power IPP agrees to deliver power on a dispatchable basis at the
interconnection point.
1.3 Performance IPP is not obliged by any guarantee to produce electricity.

Guarantees Buyer promises to buy all electricity produced, subject to grid
constraints and on a dispatchable basis.
1.4 Engineering IPP to make good any losses to KSEB because of the parallel
warranties operation of the WEG
1.5 Other guarantees KSEB is not providing any guarantee to the IPP for
implementing the project. Enforceability of the PPA may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws.
2. Transmission
2.1 Transmission and KSEB is the STU in charge of transmission and distribution.
distribution
2.2 Interconnection IPP at its own cost maintain the tie line up to interconnection
point.
3. Dispute resolution If a dispute is not amicably resolved within 30 days between

Chairman of KSEB and CEO of IPP, dispute to be referred to
KSERC for adjudication as per EA 2003
24
Hoffman, Scott L. (1998) The Law and Business of International Project Finance. p.7

4. Tariff Fixed tariff of INR. 3.14/unit for 20 years
5. Carbon Credits & IPP to organize the benefits and the credits or benefits is shared
Benefits equally by IPP and KSEB
6. Payment related If the payment by KSEB is delayed more than 60 days from
terms billing, 1.25% interest per month from the due date.
IPP to pay a rebate of 2% if KSEB pay within due date of the

bill
Table 2 Major features of Kerala Model PPA
6.2 Market/Demand risk allocation

Section 6.1 of the Model PPA specifies the terms for purchasing energy from the private
developer as follows.
“The Company agrees to sell and the Buyer agrees to purchase the entire energy made
available by the Company at the interconnection point as per the Tariff specified in the
Article 9 during the term of this agreement or till the termination date in the event of
termination.
It is further agreed by, and between the parties that the Project will be operated on
dispatchable basis and that the company shall operate the project at the nominal capacity or
less, as may be directed by the Buyer from time to time, subject to Technical limits, Prudent
Utility Practices, availability declaration by the Company and at a power factor as per Article
4.1 (h) and within the frequency range between 48.5 Hz and 51.0 Hz.”25
In this section, we will consider the implication of the agreement to purchase power on a
dispatchable basis.
6.2.1 Market/demand risk and renewable energy
Electric energy production by the producer and usage by the consumer are in real time. This
creates demand risk for parties involved in power contracts since consumer usage is a
variable. A dispatchable contract gives KSEB to dictate the Seller the quantity of power to
generate and schedule for production. “Renewable generation technologies are typically
more difficult to dispatch than natural gas-fired generation technologies”26.
6.2.2 Effect of purchase on a dispatchable basis
Wind energy is an intermittent power source. “An intermittent resource is an electric

generator that is not dispatchable and cannot store its fuel source and therefore cannot
25
Kerala State Electricity Regulatory Commission Model Power Purchase Agreement for IIPs In Private
Land Article 6.1
26
Wiser, Ryan (2003) Comparing the risk profiles of renewable and natural gas-fired electricity contracts.

respond to changes in system demand or respond to transmission security constraints.”27

Wind energy is a weather-driven energy resource and the current technology is not cost
effective for energy generation in a dispatchable basis.
It is a common practice by purchasers to use dispatchable natural-gas contracts and non-
dispatchable renewable energy contracts. Consider the example of “California DWR, none of
the renewable contracts are dispatchable while natural-gas fired plants are dispatchable”28.
Also, as per the European Union Directive for renewable energy production, “Member States
shall take the necessary measures to ensure that transmission system operators and
distribution system operators in their territory guarantee the transmission and distribution of
electricity produced from renewable energy sources. They may also provide for priority
access to the grid system of electricity produced from renewable energy sources. When
dispatching generating installations, transmission system operators shall give priority to
generating installations using renewable energy sources insofar as the operation of the
national electricity system permits”29. “Spain, Denmark, Germany and Greece all provide
priority dispatch of Renewable Energy in accordance with EU Directive 2001/77/EC”30.
Moving from a Single Buyer model to a Single Energy Market is common when the market
matures. One could also consider the example of Ireland during its move towards a Single
Energy Market (SEM). “Under the SEM it is proposed that this obligation (priority dispatch
of Renewable Energy generators) will be fulfilled through enabling renewable generators to
become Price Takers in the market”31.
“Numerous utility studies have indicated that wind can readily be absorbed in an integrated
network until the wind capacity accounts for about 20% of maximum demand. Beyond this,
some modest changes to operational practice may be needed, but there are no "cut-off"
points”32. “As of 2006, Kerala has 2.03 MW of wind energy in comparison to the total
installed capacity of 3565 MW”33. In addition, PPRDL 06 stipulates a target of “2% of total
consumption per year for wind energy”34.
To conclude, for a meaningful growth of renewable energy production in Kerala, the model
PPA should not be insisting on purchase of power on a dispatchable basis.
27
Federal Energy Regulatory Commission 18 CFR Part 35 footnote 1
28
Refer Wiser, Ryan (2003) Comparing the risk profiles of renewable and natural gas-fired electricity
contracts.
29
The European Parliament and the Council of the EU (2001) 2001/77/EC Article 7.1
30
Scott, N.C (2007) European practices with grid connection, reinforcement, constraint and charging of
renewable energy projects
31
A&L Goodbody Solicitors (2007) Renewable PPAs, CfDs And the Transition to the Single Electricity
Market.
32
Envis Centre on Renewable Energy and Environment (2006) Wind Energy Information.
33
Kerala Planning Board (2006) Energy Development.
34
Kerala State Electricity Regulatory Commission (2006) Power procurement from renewable sources by
distribution license regulations, 2006.

6.3 Performance risk

6.3.1 Grid Performance risk
Section 4.1 (i) of the Model PPA specifies the responsibilities of the private developer
(Seller) as follows.
“The Company shall, in case of constraints in the Kerala grid or in Buyer’s evacuation
system, back down the generation till such time normalcy is restored as directed by State
Load Dispatch Centre”35.
As per the law governing the PPA, “The Developer shall abide by grid discipline and will not
be eligible for any compensation in the event of grid failure, shut down, interruption in power
supply etc., resulting in non-consumption of generated energy”36.
6.3.1.1 Hidden cost and commitment by developer in relation to the grid/transmission
The governing law as of 2006 for the PPA states that the “cost of any modification/ up-
gradation/ strengthening of substation of KSEB/ STU for drawing power from the Wind
Farm shall be borne initially by ANERT, which will also be included in the cost being
collected from the Developer”.
Previous version of Kerala’s renewable policy (2002) stipulates the following,
“Kerala State Electricity Board will undertake to augment the sub-station capacity at its cost
to receive the power generated by the eligible producer. The KSEB will also undertake the
augmentation of transmission lines and laying of new lines if required”.
Specific instruction on grid interfacing as per central government policy on non-conventional
energy is as follows,
“Depending upon the generation capacity, if the sub-station capacity at 33/11 KV or higher
levels is required to be augmented or 66KV or higher capacity transmission lines are to be
provided, this will be undertaken by the SEB, at their cost”37.
The governing law in the State has changed against the private developer and it seems to take
advantage of the powerful negotiating position of the STU thereby diminishing the chance of
growth. Other than bearing the risk of performance of the grid, developer is to finance the
cost of upgrading the grid. This adds an unknown cost during project development and the
money is to be spent with the knowledge that it will not mitigate the risk of a non-
performing grid.
35
Kerala State Electricity Regulatory Commission Model Power Purchase Agreement for IIPs In Private
Land Section 4.1 (i).
36
Government of Kerala(2004) Policy Guidelines for the development of wind power in Kerala through
private developers.
37
Ministry of Non-Conventional Energy Government of India Non-conventional Energy Policy Guidelines
to States. Available at Appendix A of Hauber, Grant(2007) Wind Energy Finance – Mobilising European
Investment in the Indian Wind Sector.

It is worthwhile to consider the example of the USA when it comes to improvement costs to
grid performance. In the US, the Federal Energy Regulatory Commission is a comparison for
SERC in India. As per the rules in the US, “Any electric utility, Federal power marketing
agency, or any other person generating electric energy for sale or resale, may apply to the
Commission for an order under this subsection requiring a transmitting utility to provide
transmission services (including any enlargement of transmission capacity necessary to
provide such services) to the applicant”38. “Senator Johnston’s proposal for allowing
transmitting utilities to recover a fully embedded cost rate as well as the cost of any
transmission system improvements from transmission customer was not approved for FERC
pricing policies”39.
6.4 Summary of Model PPA Analysis and Risk Allocation

To conclude, the Kerala Model PPA’s risk allocation jeopardizes IPP interests. Table 3 gives
a summary of risks and allocation between parties as per the Model PPA.
Type of Risk Event Consequences Risk Owner Mitigation
Political Risk Changes in Law, Project Stopped Developer Additional Cost

Regulation
Project Delay
Environment Force Majeure Repair Cost Developer Insurance,

Additional Cost
Compliance No Dispatch
Issue
Performance Grid Capacity Upgrading of Developer Additional

Risk grid Capital expense
Grid No Dispatch Developer Lowering

Unavailability revenue
Market Risk Reduced Reduced Developer Lowering

Demand/Market Dispatch revenue
Table 3 Model PPA – Risk Allocation
38
Excerpt from 16 U.S.C 824j (SEC.211 of the USA Federal Power Act as amended by the Energy Policy Act
of 1992.)
39
Dudley, William M et al (1993) Electric Power Purchasing Handbook. P.201

7 Investment appraisal of a hypothetical Wind Energy Project in Kerala
In this section, we will conduct the investment appraisal of a hypothetical Wind Energy
Project in Kerala. We are considering the location “Pullikanam in Idukki district in Kerala
with a mean annual wind speed of 4.91 m/second and a mean annual wind power density of
200 W/m2 at an elevation of 50m “40. For this analysis, we are considering the values as per
PPRDL 06 as explained in the 5.2.2. The only different value used in this analysis is the
applicable interest rate. “The interest rate for a fixed period of 10 years is used as 11.25% as
per current guidelines of IREDA”41 instead of 9% as suggested by PPRDL 06.
We have not considered the impact of revenue from CER and the impact of 10.1% minimum
alternate tax on revenues in this analysis. We are also limiting this analysis to a single
financing option. We are considering project finance from IREDA Wind Power
Development Programme. As the finance is sourced in India itself, we are not considering
foreign exchange and related risks and sensitivity.
The discount rate was calculated by adding an assumed optimistic spread of 2% to weighted
average cost of capital (WACC). WACC was calculated using the following formula.
Wc = (Equity Contribution/Total Cost) X Required Return on Equity +
(Debt/Total Cost) X Required rate of return on debt X (1- Tax rate)

In Table 4, we are calculating the NPV and IRR at a discount rate of 13.28% and we
considered the required return on equity as 14% as per 5.2.2. However, the hurdle rate to
consider in India for investing in a similar project is considered in the region of “20 to
25%”42. That is the typical rate of return expected by private investors for investing in
infrastructure projects in developing countries.
As we can see from Table 4, we are getting a negative NPV with calculations based on 14%
required return on equity itself and we conclude that the project is not viable.
40
Centre for Wind Energy Technology (July 2007)List of 216 Potential Sites for WindPower Projects in the
Country
41
Indian Renewable Energy Development Agency Limited (2007) Wind Power Development Programme
Guidelines for Loan Assistance.
42
Ahluwalia, Montek S Financing Private Infrastructure: Lessons from India

Parameter Value Comments
Rated Capacity of the 1 MW

Turbine
Capacity Utilisation 22%

Factor (CUF)
Yearly energy production 1927200 KWH 1. Considering 8760 hours of production in an

year.
2. 1MW=1000KW
3. Rated capacity X CUF X hours
Tariff INR 3.14/unit for 20 years. 1 unit = 1KWH
Revenue per year INR 0.61 Crores 1. 1 Crore INR = 100X100,000
**Risk Factor: Revenue may go down 2. For 20 years

as the production is on dispatchable
basis.
Capital Cost (including Rs. 4.4 Crore Cost for 1 MW.

connection till
**Risk Factor: This may go up if there
interconnection point)
is a need to upgrade the grid.
Cost of debt 11.25% Repayment period of 10 years, fixed interest, IRDEA

loan. 70% debt and 30% equity
1% processing fee for the loan
Interest payable per year INR 0.53 Crore

for 10 years
Depreciation Rate 4.5% for 20 years with 10% residual Only the residual value is used in calculating
value cashflow to calculate NPV
Operation & 1.3% of capital invested with

Maintenance Cost escalation of 4%
Discount Rate 13.28% Weighted Average Cost of capital = 11.28%
Spread considered for risk of investor profile= 2%
Alternatively, if we take Bloomberg for India data for

market premium and risk free rate, we arrive at a
figure of 12.1%. If a 2% spread is added, we can
arrive at 14.1% discount rate. (Using a beta of 1 for a
company of no trading history)
NPV (INR 3.47) With a negative NPV, the investment does not look
viable.
Modified IRR 6% Considering a reinvestment rate of 18%
Table 4 Investment Appraisal Summary43
43
Please refer Appendix I for the excel sheet which was used to create this summary table.

8 Conclusion
India is growing at a very fast pace in the RE sector, especially in Wind Energy. There are
definitely many opportunities for investors in this area. India’s central government policies in
this sector are open and investor friendly. However, as we conclude from this case study, the
way in which State level policies are implemented could jeopardize investor interests in this
sector and alienate small power developers or similar wind farm operators. Potential
investors in this sector need to consider the apparent risk factors of the model PPA while
preparing for PPA negotiation.

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10 Appendix I


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Wind Energy Projects in Kerala,India – considerations for

Version Date Author Comments

5 ADMINISTRATIVE, LEGAL AND FINANCIAL FRAMEWORK FOR WIND

6 ANALYSIS OF KERALA MODEL POWER PURCHASE AGREEMENT ........... 11

7 INVESTMENT APPRAISAL OF A HYPOTHETICAL WIND ENERGY

©J Cyriac Student 2008 Page 2

ANERT Agency for Non-Conventional Energy and Rural

C-WET Centre for Wind Energy Technology

CER Certified Emission Reduction Credit

CTU Central Transmission Utility

DWK 04 Policy Guidelines for the development of wind power

EA 2003 Electricity Act 2003

ERC 1998 Electricity Regulatory Commissions Act 1998

ESA 1948 Electricity (Supply) Act of 1948

IE 1910 Indian Electricity Act of 1910

INR Indian Rupees

IPP Independent Power Producer

IREDA Indian Renewable Energy Development Agency

KSEB Kerala State Electricity Board

KSERC Kerala State Electricity Regulatory Commission

MNES Ministry of Non-conventional Energy Sources

NLDC National Load Dispatch Centre

PPA Power Purchase Agreement

PPRDL 06 Power procurement from renewable sources by

RLDC Regional Load Dispatch Centre

SEB State Electricity Board

SLDC State Load Dispatch Centre

STU State Transmission Utility

©J Cyriac Student 2008 Page 3

4.1 Wind energy in India

©J Cyriac Student 2008 Page 4

4.2 Policy framework for Wind Energy Project in India

©J Cyriac Student 2008 Page 5

4.2.2.1 Fiscal Incentives

• A comprehensive wind-mapping programme, largest in the world

• Setting up of demonstration wind power projects

• Policy of accelerated depreciation, concessions in import duty etc

©J Cyriac Student 2008 Page 6

• Encouragement towards development of indigenous wind turbine manufacturing

• Setting up of Indian Renewable Energy Development Agency (IREDA) and enabling

4.3 Wind Energy in Kerala, India

5 Administrative, Legal and financial framework for Wind Energy

5.1 Overview of Administrative framework

• promote cogeneration and generation of electricity from renewable sources of

©J Cyriac Student 2008 Page 7

5.1.4 Agency for Non-Conventional Energy and Rural Technology (ANERT)18

ANERT is an autonomous body of the Government of Kerala under the Department of

©J Cyriac Student 2008 Page 8

• Research and Development

• Wind Resource Assessment

• Wind Turbine Testing

• Standards and Certification

• Information, Training, and Commercial Services

5.2 Overview of Legal framework governing the Kerala Model PPA

5.2.2 Power Procurement from renewable Sources by Distribution Licensee regulations,

Capacity Utilisation Factor (CUF) 22%

Auxiliary Consumption 0.5%

Capital Cost (including connection till Rs. 4.4 Crore/MW

Life of Plant 20 Years

Depreciation Rate 4.5% for 20 years with 10% residual

Operation & Maintenance Cost 1.3% of capital invested with escalation

©J Cyriac Student 2008 Page 9

Interest cost on long term debt 9%

Loan repayment period 10 years